PORTER’S FIVE FORCES ON BANKING/FINANCE INDUSTRY

Bargaining power of Customers

Banking/Finance industry relies on bargaining power of customers but it is highly relative as it

depends on the mass we are talking, i.e., an individual customer has little to no impact on the
institution while a mass attrition impacts the institution to a great extent.

Bargaining power of customers is Moderate in banking/finance sector due to various factors:

1. Large number of suppliers: Customers have large number of institutions to choose from.

2. Low Switching Cost: Due to rise in technology and the availability of internet the switching
cost from one bank to other becomes very easy due to increasing trend of internet banking.

3. No differentiation in service: All banks and financial institutions provide more or less the
same services which results in increasing bargaining power of customers.

4. Availability of Information: Nowadays customers have access to all kind of information and
that too in-depth which provides them with the upper hand in bargaining. Due to globalization
and digitalization the customers become advance and sophisticated, they are aware of market
conditions and known about the various services different banks offers.

Bargaining power of Suppliers

Bargaining power of suppliers is Low in banking/finance sector.

The major suppliers of banking sectors are depositors and the employee aka resource of labor.

There are various reasons for low bargaining power of suppliers:

1. Nature of Suppliers: Suppliers of banks (depositors) are generally those people who prefer
low risk and those who need regular income and safety as well. Bank is best place for them to
deposit their surplus money. Their trust on bank decreases their bargaining power.

2. Few Alternatives for Depositors: Depositors have very few/limited options for investment
which are as safe as bank.
 PORTER’S FIVE FORCES ON BANKING/FINANCE INDUSTRY

3. RBI Rules and Regulations: RBI takes all the decisions in relation to the banks. Banks have to
follow and adhere to the rules and regulations of RBI and behave in a way in which RBI wants.
RBI takes all the decisions about interest rate, etc. which leaves suppliers with less bargaining
power.

4. Suppliers are individuals: The suppliers of the banks (depositors) are individuals with very
little portion to invest which decreases their bargaining power. If depositors behave collectively,
they will have more bargaining power.

Rivalry among Existing Competitors

Rivalry in banking/finance industry is very High.

There are so many private, public, co-operative and non-financial institutions operating in the
industry. The number of factors has contributed to increase rivalry those are:

1. A large number of players: There are many banks, financial institutions that are fighting for
the same goal.

2. High market growth rate: India’s banking/finance industry is seen as one of the largest
markets having a great growth potential. This rise to the competition.

3. Low Regulations for Entry: The are low regulations policy from government which opens
doors for new players to enter.

4. Low Switching Cost: Customers switching cost is very low which makes customers to switch
from one institution to other and which provide great opportunity for institutions to grab
customers which eventually increases competition.
 PORTER’S FIVE FORCES ON BANKING/FINANCE INDUSTRY

Threat of Substitutes Products

The threat of Substitutes Products in banking/financial is High.

There are plenty of substitutes in banking/finance sector. Banks offer a suite of services over and above
taking deposits and lending money, but whether it is insurance, mutual funds or fixed income securities,
chances are there is a non-banking financial services company that can offer similar services. On the
lending side of the business, banks are seeing competition rise from unconventional companies.

Threat of New Entrants

The threat of New Entrants in Banking/financial industry is High.

Barriers to an entry in banking industry no longer exist. So, lots of private and foreign banks are entering
in the market. Competitors can come from any industry to “disintermediate” banks. Product
differentiation is very difficult for banks and exit is difficult. Government policies are supportive to
start a new bank. There are less statutory requirements needed to start a new venture. Every
bank tries to achieve economies of scale through use of technology and selecting and training
manpower.